January 30, 2025
Market Update: January 21, 2025
Welcome to the Monthly Market Update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this month.
January has had a pretty decent start for 2025 with the market up about 2% as of January 21st. We had previously been in a downward trend but have recently broken out of that trend and appear to be marching back towards all-time highs. At least until this week when AI stocks were disrupted.
As we enter into 2025 and look ahead for the markets, I wanted to point out the unique idiosyncrasies of the current market that are really unprecedented. By now, everyone should be aware of the domination of the top 10 stocks in the S&P 500. These are the familiar names: Microsoft, Amazon, Meta, Apple, Nvidia, etc. Focusing your attention on the graph on the left, the valuation of these names has climbed to very high levels. While these valuations are not nearly as alarming as 2021 or 1999 levels, they’re still quite high. More unprecedented, however, is the graph on the top right. The concentration of the top 10 stocks within the S&P 500 is now nearly 40%. This is the highest concentration of stock weighting for the data we have available going back to 1996. Furthermore, these 10 companies are spending. A LOT. Just 10 companies account for 41% of R&D and 19% of capital expenditures throughout the entire S&P 500 index which is composed of 490 other stocks.
Yet despite this level of spending, these firms are significantly more profitable than any other concentration point in history. The free cash flow margin for the top 6 firms is nearly 30% and almost double the average historical free cash flow margin in history. In other words, these 6 firms are WAY outsizing the rest of the market in terms of value. But they’re also WAY outsizing the rest of the market on spending AND they’re STILL the most profitable firms going back to 1991. They’re more profitable than Exxon Mobile back in 2012, considered the largest firm in US history at the time. They’re more profitable than GE in 2008, considered the best run firm in US history at the time. And they’re more profitable than Microsoft in 1999 when it was considered a monopoly and dominated the tech market. The conclusion to draw here is we are in unprecedented times of market concentration and profitability. Thus, it’s anyone’s guess what happens next because there is no historical analogue to today’s market.
In the short term, we are starting to see a re-broadening out of the stock market this week. Both the equal weight S&P 500 in blue and the Russell 2000 small caps in purple showed strength on the back half of last year relative to the S&P 500. This meant broad-based, unconcentrated returns throughout the market and was a sign of healthy stock returns. Beginning in November, however, both indices gave up those returns. That trend has since reversed and that’s a positive short-term indicator for the market writ-large.
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Sources:
- FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved January 22, 2025, from FactSet Database.
- JP Morgan Asset Management. Guide to the Markets. 1Q 2025, updated December 31, 2024. “S&P 500: index concentration, valuations and earnings.” Retrieved from https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/
- FactSet Research Systems. (n.d.). RSP & Russell 2000 (interactive charts). Retrieved January 22, 2025, from FactSet Database.
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The price-to-earnings (P/E) ratio measures a company’s share price relative to its earnings per share (EPS).
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